Fiscal policy and Monetary policy in India Upsc

Fiscal Policy is very popular among modern-day governments as we use it as an instrument of macroeconomic policy.

Fiscal policy has its importance because of the Great Depression and the introduction of ‘New Economics’ by Keynes.

What is Fiscal Policy?

Fiscal policy definition

Fiscal Policy is nothing but changes in government expenditure and taxes to achieve macroeconomic policy goals such as Growth, Employment, and Investments,.

fiscal policy definitions by Buehler and arthur smithies
fiscal policy definition

Fiscal Instruments

It is a tool to implement the Fiscal Policy. We also call it Fiscal tools or Fiscal levers. Fiscal tools are Government expenditure, taxation, and borrowings.


We must raise Taxation during inflation and taxed much decreased during the Depression. Taxes are of two types, Direct and Indirect Taxes.

Public Expenditure

Raising wages and salaries of the employees and controlling the aggregate demand for goods and services.

We raise public expenditure to control recession and we reduce public expenditure to control inflation.

Public Debt

The government gets money from the Public, for example, the Provident Fund (PF), etc and the government needs to pay to the public at the time of maturity.

fiscal policy tools

Objectives of fiscal policy

Adequate Employment

To create employment opportunities for the public. Ex MGNREGS

Price Stability

The mismatch between Aggregate demand and aggregate supply causes Price Instability.

Inflation is caused because of an increase in demand for goods. If this is caused by Government expenditure, an excellent method to control inflation is to cut down public expenditure.

Taxation is another method to control inflation if inflation is caused by private spending as taxation reduces disposable income and aggregate demand.

Economic Growth

Tax is used to increase investment. Tax holidays and tax rebates for new industries increase investments.

In the areas where the private show’s interest in investment, the public sector invests in it.

When there is insufficient money for the government, it borrows from internal sources example Indian Banks, Reserve Banks, and external sources such as World Bank, IMF, etc

Equitable Distribution

A progressive taxation rate helps to reduce the gap between rich and poor.

Welfare schemes for weaker sections of society such as Noon meals in schools, subsidies, and free education.

Exchange Stability

Fluctuations in the international market cause movement in international exchanges. Tax benefits and subsidies to exports will boost the exports of domestic manufacturers.

Imposing import duties to non-essential items may benefit local producers. The reduction in the import duties of raw materials and machinery will make a reduction in production cost and make exports more competitive.

Capital Formation

By giving tax benefits to the economy lower people will increase their savings and increase their spending. Here there is capital formation.

Capital formation is important for economic development. Infrastructure developments such as power and transport increase private investments.

Regional Balance

Government expenditure was used to start Industries to make industrial activities increase in industrially backward regions.

Difference between monetary policy and fiscal policy

Monetary policy refers to the actions of the Reserve Bank to achieve macroeconomic policy. For example Price Stability. On the other Fiscal policy refers to the tax and spending policies of the Central Government.

Monetary policy is managed by the Reserve bank of India and whereas Fiscal policy is managed by the Ministry of finance.

Monetary policy is determined by the interest rate, for borrowing and injecting money into the economy. On the other hand, Fiscal policy is determined by capital expenditure and taxes.

In India, the Monetary Policy majorly deals with money, currency, and interest rates. On the other hand, under the fiscal policy, the government deals with taxation and spending by the Centre.

Monetary policy targets and tries to control inflation. But the fiscal policy does not have any specific targets.

Tools of fiscal policy in India

Tools of fiscal policy in India are Budget, Taxation, Public Expenditure, public revenue, Public Debt, and Fiscal Deficit in the economy.

In this, the primary tools are government expenditure and taxation.

Fiscal policy in India is taxation and spending. The main objectives of fiscal policy are full employment, economic growth, control debt, control inflation, re-distribution, etc.

Tools of Monetary Policy

Reserve bank of India has four primary monetary tools for managing the money supply. These are the reserve requirement, open market operations, the discount rate, and interest on excess reserves.

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* * All the Notes in this blog, are referred from Tamil Nadu State Board Books and Samacheer Kalvi Books. Kindly check with the original Tamil Nadu state board books and Ncert Books.
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